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Cracking the code of ROI through ERP
15th July 2019

If a business buys and implements an ERP solution, it is making an investment. And sometimes, a significant investment. An ERP System is simply a module of the business so any ROI from ERP can only come from an ROI arising from a change to the model of that business. This is one of the most exciting parts of working with an ERP. You can propose changes to the way a business runs and quantify the estimated financial effects of those changes.

Finding ROI in a business can be summed by a simple phrase which comes directly from the movies. If you have seen any buddy cop movie ever made, there’s always a moment when the detectives are trying to find the master criminal and the logic that the detectives use to find the master criminal is the same logic usually used to identify ROI. It’s one simple phrase – ‘Follow the Money’. In a business model, there are a lot of things going on here. If we over-focus on every little detail, we risk getting lost in the dozens of possibility of incremental performance improvements or money-saving opportunities that an ERP can provide. Looking at big-time ROIs, we can apply the buddy cop rule and follow the money. If you are looking at big money items in the business, they are all right there in your financial statements.

Sectors of Business Involving ROI and the Benefits of an ERP System

There are always 4 big ticket areas in a business that can quickly and directly be influenced by implementing an ERP System:

Purchasing Spends. An average business spends a huge percentage of its revenue acquiring its supplies. Purchasing people are only human and they make bad decisions at times, causing items that come at competitive rates to be bought at an expensive deal. A good ERP System will help the purchasing department identify saving opportunities by calling out items with single suppliers or without current purchase contracts and the system would prevent those expensive premium rush orders through proper purchase planning.

Inventory. Why can Inventory can be looked as an ROI opportunity? You need to ask yourselves these questions- Do you need all that inventory? Do suppliers bring in material too early before you need them? In short, are you 100% sure that your inventory investment is under control?

What if you could run the same book of business but with less inventory? Potential ROI is millions of dollars. A good ERP system will help you buy the correct amount at the best available price and only when you need them according to your defined inventory strategy.

Accounts Receivable. This is our third ROI area. This is the only area where 100% of the revenue passes. Let us do the math. Unless you run cash on delivery business, you are going to extend credit to your customers. Let’s say you give your customer 30 days to pay what they buy, in that case, you can reasonably expect the customer of your $300 million business to owe you at any given time say $30 million. So, what must happen to ensure you get paid on time? Well, you must make sure that your deals are getting invoiced correctly. At any given time, you are waiting for your $30 million that your customers have promised to pay you. And with that much money flowing around, the ROI opportunities are often in millions of dollars. We can use the ERP system to control invoicing and collection. ERP System can help you perform regular credit checks on your customers just to ensure you don’t sell to a company that has financial problems or may not be able to pay their bills. And your ERP can help you identify and chase payments that are even one day late so that you collect your payments on time.

Cost of IT Staff. The last big ticket would be a tangible one – i.e. reducing the cost of your IT staff. With the shift to the cloud, we can find that many organizations are able to reduce internal IT cost because these cloud-based ERP systems do require very little if not any IT maintenance. In addition, you have a reduction in the cost of software licensing, hardware infrastructure as well as ongoing maintenance and upgrades. So, the cloud shift is perhaps the most impactful on reducing the IT cost.

Conclusion

ERP software solutions were created to integrate all the tools necessary in managing a business external and internal operations. Without it, executives and business owners will have to rely on multiple programs for different processes, making data migration and analysis too complex and time-consuming.

To understand how Microsoft Dynamics ERP can help your business operate to its optimum potential, please reach out to us at marketing@levtechconsulting.com

 

 

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